Ackman's 'death blow' against Herbalife isn't

Activist investor William Ackman unveiled the details of a two-year, $50 million investigation by his hedge fund into the company Herbalife on Tuesday. But investors were not impressed, and the company's stock surged during the presentation.

California-based Herbalife is in the crosshairs of investor William Ackman.

Activist investor William Ackman released the results Tuesday of his hedge fund's two-year investigation into Herbalife, the nutrition-sales company he's bet $1 billion is a pyramid scheme.

But so far, the discoveries Mr. Ackman said would be a "death blow" to the company haven't hurt its stock price. In fact, the price soared in the midst of the lengthy and colorful Manhattan event before some 400 investors and thousands more viewing online.

Investigators hired by Mr. Ackman's hedge fund, Pershing Square Capital, infiltrated 240 "nutrition clubs"—owned and operated by Herbalife's independent distributors—from South America, to Mexico, to Queens. There are 3,000 clubs in New York City, primarily in heavily Hispanic communities in Corona, Queens, the South Bronx and Brooklyn. The multi-level marketing company specializes in vitamins, dietary supplements and shakes encouraging weight loss and healthier living, and is sold by the independent distributors.

"It's a tragedy. They don't realize they're being defrauded," said Mr. Ackman, who fought back tears recalling his family's own immigrant roots. "They're selling the American Dream to these people."

Mr. Ackman said the "clubs" are designed to train and recruit new members to sell the shakes, not to serve as a gathering place to consume them, as Herbalife says. The investor said the clubs' business model is a pyramid scheme because it relies on selling to unwitting new sales recruits. Other companies like Mary Kay also have independent distributors, but Herbalife stands out because it exploits "the poorest of the poor," he said.

"It's time to shut the company down," Mr. Ackman said.

Appearing on CNBC Tuesday morning, Herbalife CFO John DeSimon said Mr. Ackman's claims were "outrageous" and that the nutrition clubs were merely "social gatherings" to encourage use of the company's shakes.

Los Angeles-based Herbalife, valued at $6 billion, says Mr. Ackman is crusading against the company because of his $1 billion short against it. Other investors, such as billionaires George Soros and Carl Icahn, have bet on the opposite side of Mr. Ackman.

In March, The New York Timespublished a lengthy article revealing Mr. Ackman's massive public-relations blitz against Herbalife, which included persuading lawmakers to write letters calling for an investigation. At Tuesday's event, Mr. Ackman called the article "fraudulent" and "one of the lowest moments in the history of the New York Times."

Still, multiple agencies have opened investigations, including the Federal Trade Commission. Mr. Ackman said Tuesday he is also hopeful New York Attorney General Eric Schneiderman will probe the company in light of Pershing Square's findings.

Pershing Square spent $50 million on the two-year investigation. Herbalife's stock price fell in the run-up to Mr. Ackman's presentation, but by the end of the three-and-a-half hour event, around 1:30 p.m. Tuesday, it had surged 16%. If the figure holds, it would be the stock's best single-day performance in years.

Mr. Ackman, however, said the media shouldn't pay attention to the stock's short-term movements, and speculated that Herbalife was buying back shares in response to his disclosures.

One reporter asked Mr. Ackman if he was trying to goad Herbalife into suing him for defamation by comparing the company to the mob, Nazis and Ponzi-schemer Bernie Madoff during his presentation. A lawsuit might allow Mr. Ackman to obtain internal documents from the company during discovery, the reporter noted.